Third-party contributions not allowed in NPS tier-II accounts

New Delhi, Jan. 18 -- If you invest in the National Pension System (NPS) and have a tier-II account, you can no longer make contributions to it through third-party payments. In order to check the misuse of tier-II accounts the Pension Fund Regulatory and Development Authority (PFRDA), in a circular dated 13 January, has disallowed any third-party contributions to these accounts.
The regulator has also directed the points of presence (distribution channel) and the distribution channels to ensure that NPS contributions made by the subscribers are from their own bank account and through their legitimate source of funds.
But before we delve into what this means for you, let us understand tier-II accounts.
Tier-II account
NPS is a defined contribution retirement product, which needs you to contribute regularly till you are 60 years of age.
You start your contributions in NPS through the retirement account, or what is also called the tier-I account.
This account comes with a lock-in till 60 years of age. In other words, if you choose to withdraw your money before then, you only get 20% and rest gets annuitized.
Annuity is a pension product that gives regular payouts. However, you can make partial withdrawals from it for specified events.
Tier-II accounts, on the other hand, are completely optional and flexible.
They work more like savings accounts, from which you can withdraw money whenever you want. In fact, as per recent changes to the rules, you can even skip making contributions to this account and even continue with a zero balance account.
In terms of investment, tier-II accounts mirror the architecture of tier-I accounts. Here too, you can choose from four fund options to invest your money: scheme G invests in government securities, scheme C in fixed income instruments other than government securities, scheme E in equities (limited to 50%) and scheme A in alternate investment funds (you cannot put more than 5% in them).
You can either choose to invest directly or choose a life cycle-based approach, which decides the asset allocation as per your age.
Tier-II accounts are subject to the same costs as tier-I accounts, except that there are no additional annual central record keeping charges for the maintenance of the accounts.
The crucial difference, though, is the tax treatment. As tier-II are not retirement accounts and do not have any lock-in period, the subscribers cannot claim any tax benefits from these accounts.
Third-party payments barred
As per a PFRDA official we spoke to, till now the rules were not clearly defined on third-party payments. So, anyone could invest, on your behalf, in the tier-II account. And given that it has the flexibility of unlimited withdrawal, this account was open to misuse.
The circular, therefore, states that only the subscriber can make contributions to it, from her bank account and through her legitimate sources of funds.